Over the course of many years traders typically will see slow and steady gains during market uptrends and then sudden and sizable losses during periods of correction. There is much truth to the old saying that the market takes the escalator up and the elevator down.
Even if you are aware of this tendency for losses to come much quicker than gains, it is extremely difficult to avoid suffering that fate when a correction occurs. It should always be the goal of traders to limit the drawdowns that occur when the market enters a corrective phase but almost every honest trader will admit that they give back too much when a turn comes. Corrections come quickly and are always difficult to recognize in their early stages which will result in some sizable losses before the appropriate action can be taken.
Avoiding drawdowns and focusing on keeping your account as close to all-time highs as possible is the best way to produce superior returns. Making up losses is one of the most unproductive things you can do but it is unavoidable at times when the market goes through a difficult phase like it has recently.
Before you can start recovering from a beating by the market beast the first step is to be careful about declaring that a bottom has occurred. A true market bottom will not be readily apparent until well after the fact and if you try too hard in trying to time an exact low the probability of incurring further losses is high. Nothing wipes out more traders than averaging down as they try to predict a turn.
When trying to catch a market that is in the early stages of recovering from a correction, it is paramount that time frames be kept short and stops tight. The first rule of holes always applies - when you are in one stop digging.
As the corrective phase of the market eventually comes to an end these are the steps you need to take to start rebuilding your portfolio back to all-time highs.
1. Dump the mental baggage. The most important step in recovering after a beating is to clear your mind and regain your objectivity. When you have suffered losses and given back some big gains there will be a tendency to doubt your judgment. Your confidence will be shaken and you will be hesitant to take on risk.
The best way to deal with this is to be aware of the tendency and to start by taking smaller trades with shorter time frames to rebuild your confidence. After some success you will not only have more confidence in the market but in yourself.
2. Move incrementally. There is often a tendency to try to make up losses with some very aggressive trades. The thinking is that if we can suffer big losses that quickly then we can certainly make them up just as quickly with some aggressive trades.
That sort of thinking is an easy way to dig an even deeper hole. Your judgment about the state of the market may still be poor and it can be shocking how a 'good' stock can fail to cooperate.
Rebuilding a portfolio to all-time highs will take time. It is a daily slog but if you are persistent and steady it will happen. I've been through this many times and in every situation after a big loss I will have accounts back at all-time highs sooner than I expected.
3. Abandon loyalty to specific stocks. Typically, the stocks that racked up the biggest losses for you will not be the stocks that lead your account back to new highs. Loyalty to a stock that has treated you badly is not often repaid.
After a corrective phase it is likely that there will be a new crop of leaders and different sectors that will outperform. It can be very difficult to make the shift to new names once you have grown used to owning something like Apple (AAPL) or Nvidia (NVDA) but those are not likely to be the stocks that will help you bounce back quickly. You need to find new ideas and new leaders.
4. Ramp up your trading discipline. The biggest challenges in the early stages of a market recovery are finding good charts and putting effective amounts of cash to work. If you are a trend follower that looks for positive charts, there will be few opportunities to go big right away. It is important to keep on trying but to use very strict discipline to limit any further losses. When you are bottom fishing after a correction it may take several tries to catch a stock at an early point.
5. Don't be afraid of a series of small losses. The best way to get cash to work is to buy positions and then manage them carefully as you wait for a market trend to develop. If a trade doesn't work then take the loss and try again. If you have targeted the right stocks the big move will come but it is impossible to time turns with precision so you must be ready for some false starts.
6. Amend your trading style as a recovery develops. The most effective form of trading as the market recovers from a deep correction will shift. At first the best trades will be countertrend moves and oversold bounces. These require very short time frames and a different strategy. As a recovery develops you can shift to longer-term position trades. It is riding the renewed uptrend that will produce the best results but that will require patience and will be very difficult when the shock of a correction is still having a market impact.
No one likes to see a big drop in their account during a market correction but it is inevitable unless you are a day trade. Don't let it impact you emotionally. It is the nature of the beast and you can take comfort in the fact that the one great certain of the market is that there will be new opportunities again. Building your account back to highs is hard work but the market will give you plenty of chances to do so. You just need to put forth the effort.